Friday, March 26, 2010

With the collapse of Investment, Consumption has roared to record highs as a percentage of GDP. Data to 2009Q4. Who would want to invest in the United States when there are fiscally solvent, rapidly growing emerging economies to invest in?

Monday, March 22, 2010

The next major resistance for the NDX is the 2007 high. It has blown through the 61.8% retracement level. Following the trend line it would take about another three months to reach the old high. The high might come about the time of the summer solstice. The secular bear market would continue after that. The S&P 500 is approaching 61.8% retracement levels, and seems about done.

Friday, March 19, 2010

It was a wonderful life – Jim Quinn, another devotee of the Strauss and Howe thesis that we’re entering “the fourth [generational] turning” into Secular Winter. Quinn writes with passion and color, so I recommend his article. It’s important to remember that as America enters into the Crisis, which is essentially inevitable, the Resolution is a matter of Choice, Collective Choice, if we can figure out a way to do it.

Last weekend I reread Strauss and Howe’s dispensations on how to conduct oneself in preparation for the Winter. In summary, they counsel to their readers in the mid-Nineties:

Brace: Gird for the weakening or collapse of public support mechanisms.

Hedge: Diversify everything you do.

I suppose it’s par for the course the nation would have flunked all the “prepare” admonitions given a over a decade ago, otherwise we wouldn’t face the Crisis that we do. Bill Clinton and his Republican Congress admirably got the budget into balance, but the money men exploited one of Bubba’s weaknesses and liberalized the credit markets, setting the stage for the current financial crisis, with the ever accommodating help of Alan Greenspan and his Mini-Me, Ben Bernanke.

My surmise is that we are entering an Age of Nonlinearity such as no one living (or who has ever lived) has ever experienced. I believe personal intentionality will play a transcendent role in the dynamics of what comes, so I’d add one more prescription to those above: Do unto others as you would have them do unto you. Reputation effects are likely to matter in the Crisis.

Here are some links to previous articles on The Fourth Turning with embedded links to the book:

Should be read in conjunction with that oldie-but goodie, “Finite-time singularity in the dynamics of the world population, economic and financial indices” found here. The physicists predict the Singularity (not the Kurzweil one) at the End of the Growth Era within the lifetimes of the Baby Boomers….

“Effective demand” is the dollars flowing into actual demand. In a collapse of effective demand most people simply don’t have or spend enough money, and aggregate demand collapses. This is where I think we are heading.

Final dollar sales to domestic purchasers are on a downward trend…this the flow of money in dollar terms from Americans into the spending stream….

…even as dollar disposable income staggers upward with help from occasional fiscal injections with the rate of consumption spending out of disposable income returning to a long-term trend rate of 93 percent…

Of components contributing demand, only consumption has risen to pre-Great Recession levels in dollar terms. Any whiff of inflation is translated immediately into lower real purchasing power. Private domestic investment is at 2002 levels in dollar terms; it is at 1998 levels inflation-adjusted. Consumption depends on the household sector that depends on jobs and income to spend. Wisely, Congress extended unemployment benefits through 2010. But a second round of exotic mortgage rate resets is due later in 2010 and 2011, and it is more difficult than any time in the past 30 years to get a job in America…

…while a strong dollar, so necessary to our continued successful Treasury auctions, hurts us in exporting manufactured goods, the United States still having the largest industrial output of any nation, and the developing world growing much faster than we are and in need of manufactured capital goods. Our net exports are solidly negative and cannot be counted on to pull up aggregate demand in the near future, though they may drag it down less.

Thus a rebalancing of domestic demand would seem to be required to forestall a potential humanitarian disaster in the United States, namely entrance into a depression as domestic effective demand collapses. As I have maintained all along, the government needs to provide poverty level workfare to the unemployed and health care to all Americans. The next recession is likely to be even more severe than the recent one. Those to whom much has been given (as all products are joint) need to step up to the plate.

However, it may be that Americans’ collective distrust of government, and the power of entrenched interests, will prevent any rebalancing. The trash talk about the Democrat’s health bill is illustrative. The bill applies tax surcharges only to small business owners making more than $1 million a year, affecting only about 1 percent of small business owners. If the health bill goes down, I would guess that the odds of an equitable rebalancing of demand diminish radically.

America may fracture in this case, with state and local governance becoming much more important.

The last great leveling of the income distribution, that “corrected” the imbalances of the 1920s and the Great Depression (the New Deal didn’t do it) occurred in a few short years in the early 1940s, as the United States entered into a world war.

Can the income distribution become more equitable without another world war? Or do we collapse into neo-feudalism and a rigid class system for generations to come?

Sunday, March 7, 2010

“Animal spirits” or confidence levels continue to improve as Americans adapt to higher levels of unemployment and fear fades. A plausible forecast for unemployment suggests that confidence will rise to about zero in about 2012, suggesting the next presidential election will be bitterly fought.

The probability of an NBER-type downturn in the next year is about zero. The conditions for a collapse of confidence will not exist unless unemployment spikes higher than it already is above adaptation level, as it did in late 1981 and 1982. Nor is the yield curve is suggesting a collapse is in the cards near-term.

The labor market continues to look very sick. The trend in the labor market suggests that the next recession, when it does arrive in about 2013 or 2014, will be worse than this past one in terms of unemployment.

The second article is a nice summary of the myriad problems we face, many related to moral hazard, that are weighing upon the economy.

While I agree the economy is very sick, largely due to the expropriation of a morally disproportionate share of income and wealth by a ruling class that has manipulated both the corporations (our dominant social form) and federal income tax structure (which was put up for sale most recently by Ronald Reagan near the beginning of the current movement to record-high inequality), my expertise is in modeling the collapse of “animal spirits” that is the fundamental proximate cause of every business slump.

By these lights, we are in an “expansion” phase of the business cycle, and will be until the next collapse of “animal spirits,” which I tentatively forecast for about 2013, but which I’ll be able to forecast with much greater certainty a year ahead of the event.

The announcement is that I will be out-of-pocket tomorrow and Saturday. The next “animal spirits” update will be available by Monday morning.

Wednesday, March 3, 2010

The venerable Coppock Guide, and the S&P 500 adjusted for inflation, depict a situation similar to the mid-1970s, when the Vietnam War/Great Society inflation ravaged the economy. That time we had to wait for the Fed through the reelection-killing appointment by Jimmy Carter of Paul Volcker to get its nerve up to stop the inflation.

This time we are waiting for the the mountain of unpayable debt that the Fed has enabled to sink the economy. This will be the Elliott wave C leg down of this bear market. Note that the market went sideways for all of 1976 in real terms. In a deflationary environment, the market can go down and go sideways, if that’s any consolation. There’s always cash. We are still at least a few years from the Big Bottom that may occur in a deflationary collapse.

When will the bottom come? Martin Armstrong says 2011. If 2010 is like 1976, it won’t be until 2017.

Monday, March 1, 2010

Having participated in a process like this myself, where a pool of a given amount of dollars is allocated to a group to pass around as raises, giving larger percentage raises to lower-paid colleagues, I find it heartening to read that this is soemthing of a trend. If only Lloyd “Let them eat cake” Blankfein and his ilk on Wall Street—and the average Fortune 500 CEO being paid 275 times the average worker (in 1979 it was 27 times)—felt the same way.

As Newton resident Lisa Dodson, a Boston College sociology professor in the thick of a research project, was interviewing a grocery story manager in the Midwest about the difficulties of the low-income workers he supervised, he asked her a curious question: “Don’t you want to know what this does to me too?’’

She did. And so the manager talked about the sense of unfairness he felt as a supervisor, making enough to live comfortably while overseeing workers who couldn’t feed their families on the money they earned. That inequality, he told her, tainted his job, making him feel complicit in an unfair system that paid hard workers too little to cover basic needs.

The interview changed the way Dodson talked with other supervisors and managers of low-income workers, and she began to find that many of them felt the same discomfort as the grocery store manager. And many went a step further, finding ways to undermine the system and slip their workers extra money, food, or time needed to care for sick children. She was surprised how widespread these acts were. In her new book, “The Moral Underground: How Ordinary Americans Subvert an Unfair Economy,’’ she called such behavior “economic disobedience.’’

As Dodson’s questions grew more pointed, she began to hear fascinating stories. Andrew, a manager in a large Midwest food business, said he put extra money in the paychecks of those earning a “poverty wage,’’ punched out their time cards at the usual quitting time when they had to leave early for a doctor’s appointment, and gave them food.

Andrew had decided that by supervising workers who were treated unfairly - paid too little and subjected to inflexible schedules that prevented them from taking care of their families - he was playing a direct role in the unfair system, and so he was morally obligated to act.

Dodson concluded that Andrew and many like him were following the American tradition of civil disobedience - this time, against the economy - and creating a “moral underground.’’

But her book, which came out late last year, has provoked debate about the morality of such acts.

After Dodson talked about her book on a radio program, American Public Media’s “Marketplace,’’ some listeners posted comments on the show’s website arguing that supervisors like Andrew are cheating their employers.

Referring to the show’s host, a listener from Leesburg, Va., wrote, “I was surprised that throughout the entire interview, neither Tess Vigeland nor Ms. Dodson touched on what would seem to me a rather crucial point - that these ‘Ordinary Americans’ are stealing from the companies who employ them.

“The examples Ms. Dodson gave . . . are acts of theft from the companies, yet they are described as if somehow moral and virtuous. It’s one thing for me to see someone in need and open my wallet; its quite another to address that need by giving something I’ve stolen from my neighbor.’’

Although Dodson makes clear where she stands - the subtitle of her book includes the phrase “unfair economy’’ - she said she believes the debate is important.

“I think that this is a really important conversation that we should have in this country,’’ Dodson said. “What is the worst wrong here? Is it to break a rule or to pass some food over, or is it that we have tens of millions of children and people in families that are working as hard as they can and they can’t take care of their families?’’

Not all supervisors felt troubled by the plight of those who worked under them. Dodson interviewed supervisors who said they had no obligation beyond the bottom line of their company; some complained bitterly about the work ethic of those who filled low-wage jobs.

Dodson has had an unusual career trajectory for an academic. She was a union activist and an obstetrical nurse in Dorchester before she began teaching, first at Harvard and now at Boston College. In her first book, “Don’t Call Us Out of Name: The Untold Lives of Women and Girls in Poor America,’’ Dodson studied how women and their families coped in the face of welfare reform as their safety net vanished.

This time, though, she was drawn largely to the stories of those Americans who worked with the working poor, suggesting that the difficulties of that group also affect the lives of those who intersect with them.

“I feel as though there’s this tendency is this society to kind of think about low-income people as those people over there,’’ she said, “as though it’s an experience that’s sort of marginal and distant from those of us who are not poor.’’

In her new book, some of the most wrenching stories are about women who cannot afford child care and leave their children unattended at home, asking older children to watch the younger ones. They feared social service agencies would investigate them for neglect, but they felt they had no choice if they were going to keep their jobs.

“It was very common for parents to tell me that their kids spent a lot of time all by themselves at home,’’ Dodson said. “That puts the parent into just an untenable position: You’re a bad worker or you’re a bad parent.’’